ISM index heading for a fall

WASHINGTON (CBS.MW) - For months, surveys of factory executives have indicated a stronger U.S. economy than has been visible in the data on orders, output and inventories.

Economists say the mother of all sentiment surveys, the Institute for Supply Management index, could retreat in August after nine months of stratospheric readings above 60 percent.

"The ISM is more or less bound to fall," said Ian Shepherdson, chief U.S. economist for High Frequency Economics.

The ISM will release its August manufacturing index at Wednesday at 10 a.m. Eastern. Economists expect the ISM to fall to 59.8 percent from 62.0 percent in July. See Economic Calendar.

The ISM has been above 60 percent for nine straight months, the longest such streak in more than 30 years. Readings that high have typically corresponded with gross domestic product growth of 7 percent or so, about double the actual growth in the economy so far this year.

With the overall economy growing much slower than the manufacturing sector, a pull back in the ISM is inevitable and justified, said Tony Crescenzi, chief bond market strategist for Miller Tabak.

"Too much production will create unwanted inventory buildup," Crescenzi said. Since manufacturers don't want large inventories, they'll cut back on production quickly if their merchandise doesn't move.

"We see the decline to the 50s as symptomatic of the downshift in real {gross domestic product] growth from close to 5 percent in 2003 to 3.5-4 percent" in the second half of 2004, said Maury Harris, chief U.S. economist for UBS. "We do not see it as prelude to pronounced weakness that may stop the Fed from tightening come Sept. 21."

Several economists took out their erasers and lowered their forecasts for the ISM on Tuesday after the Chicago purchasing managers index plunged to 57.3 percent in August from 64.7 percent in July.

The Chicago gauge is sometimes seen as a good predictor of the national survey.

"Beginning in May, the Chicago barometer has been seesawing back and forth violently, moving in the same direction each month as the ISM but in much greater magnitudes," said Steve Stanley, chief economist for RBS Greenwich Capital. "Thus, the drop in August would appear to be entirely consistent with our projection of a small decline in the ISM tomorrow to around 60."

Rex
Nutting

Rex Nutting is a columnist and MarketWatch's international commentary editor, based in Washington. Follow him on Twitter @RexNutting.

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